“My name is Annette Smith. I am 69-years-old; I live in a small town outside of Sacramento, Calif., and am a long-time customer of Wells Fargo … I have been receiving Social Security as my only income for about 7 years. Today, my Social Security check is for about $1,200—that is the only income I have to pay all of my expenses,” she recently testified at the U.S. Senate Special Committee on Aging.

Ms. Smith said in 2007 she asked a teller at a local Wells Fargo branch about a small loan for car repairs. Staff explained the bank didn’t make small loans for under $5,000, and suggested she consider using a Wells Fargo Direct Deposit Advance instead.

“Getting the loan was easy—the bank just required me to sign into my account online and transfer over $500 from the bank. Unfortunately, paying it back has been almost impossible. It was tied into my bank account, so Wells Fargo repaid itself the $500 and $50 in fees at the beginning of each month (later it went to $37.50) when my Social Security Check of $1,200 was deposited,” she said.

“After Wells paid itself, that left me about half of my income, which wasn’t enough to pay all of my bills, so then I’d have to take another advance from the bank. The next month, the exact same thing would happen.”

Her $500 loan cost her $3,000 in fees because she could never repay it on her fixed income. The Senate hearing July 24 examined the impact payday and other short-term high-cost lending products have on seniors.

Cash-strapped older Americans are finding it easier than ever to opt for the expensive loans, whose annual interest rates can range from 225 percent to more than 500 percent.

According to the Center for Responsible Lending, Social Security recipients now account for more than a fourth of all bank payday loan borrowers. Banks are among the newest players to enter the payday loan marketplace by offering so-called deposit advances which seniors often secure through their pending monthly Social Security benefits.

“Payday loans—loans of around $350 averaging 300-400 percent annual percentage rate (APR) repaid from the borrower’s next paycheck or receipt of public benefits—are designed to create a long-term debt trap. Borrowers already struggling with regular expenses or facing an emergency expense with minimal savings are typically unable to repay the large payment of principal and fees due and meet their other expenses until their next payday,” testified Rebecca Borne, senior policy counsel, Center for Responsible Lending.

While the industry contends the loans are popular among users, consumer advocates worry that fees and overdrafts associated with the products are eroding seniors’ benefits and trapping them in a cycle of debt.

In April, the Consumer Financial Protection Bureau found these loans typically lead to a cycle of debt for consumers and indicated a willingness to exercise oversight over payday and short-term lending products.

That same month, the Federal Deposit Insurance Corporation and the Office of Comptroller of the Currency released proposed guidance on deposit advances, requiring, among other things, that banks examine customers’ income and expenses to make sure that they can actually afford to pay off the loan and associated charges.

Andrea Luquetta, policy advocate with the California Rein­vestment Coalition, has worked with Ms. Smith. “Annette’s story shows how destructive bank payday loans are for your average consumer. The banks pay themselves back by automatically deducting the money out of your bank account as soon as your income is deposited,” said Ms. Luquetta.